If you are married, you probably want to leave all, or a significant portion, of your estate to your spouse. For the average estate plan, doing so isn’t cause for special consideration. If, however, your spouse is not a citizen of the United States, you will need to take that into account. An Overland Park estate planning attorney at Parman & Easterday explains why making your non-citizen spouse a beneficiary of your estate must be accomplished with care.
The American Melting Pot
According to the U.S. Census Bureau, 11.4 million married-couple households, or 21 percent of all married-couple households in America in 2011, had at least one spouse born in another country. About 13 percent (7.3 million) of households had two foreign-born spouses, and 7 percent (4.1 million) had one native-born and one foreign-born spouse. Of the couples with one native-born spouse, 61 percent of the native-born spouses were naturalized U.S. citizens, leaving 20 percent as non-citizens. That means at that time there were almost 1.6 million married couples in the U.S. in which one spouse was a non-citizen.
Gifting Assets to Your Non-Citizen Spouse
Why does it matter if your spouse is a non-citizen? After all, you can gift assets to anyone you want, without regard to their citizenship status, right? While that is true, there are tax rules that make gifting assets to a non-citizen spouse problematic. U.S. tax laws can create problems if you fail to take your spouse’s citizenship into account when creating your estate plan.
The U.S. unlimited marital deduction allows one spouse to gift an unlimited amount of assets to the other or surviving spouse without the assets being subject to federal gift and estate tax. The theory is that those assets will be taxed when the surviving spouse later passes away. This unlimited marital deduction is not available to a non-citizen. The reason the government excludes non-citizens from taking this deduction is the fear that the non-citizen may leave the country, taking the assets with him or her, without paying Uncle Sam the taxes that would otherwise be collected. Once the assets leave the country, they are out of reach of U.S. tax authorities. By excluding non-citizens from using the marital deduction, assets are taxed when they are gifted, just as they would be if gifted to anyone other than a spouse.
Creating a QDOT Trust
One popular solution to the non-citizen spouse dilemma is to create a Qualified Domestic Trust (QDOT) and transfer into the trust the assets intended to provide for your non-citizen spouse. Your spouse is entitled to the interest from the trust assets but does not own the assets outright nor can he or she access the trust principal absent a showing of extreme hardship. An extreme hardship requires proof of an “immediate and substantial” need for money relating to “heath, maintenance, education or support” of either your spouse or someone your spouse is legally obligated to support, such as a child. Upon the death of your surviving spouse, the assets held in the trust will be distributed to the beneficiaries named in the trust, usually children and/or grandchildren. If any federal and/or state estate taxes are due at that time they will be paid at the time of distribution. Using a QDOT allows you to gift assets to your non-citizen spouse without losing a significant portion of your assets to gift and estate taxes.
Contact an Overland Park Estate Planning Attorney
For additional information, please join us for an upcoming FREE seminar. If you have additional questions or concerns about gifting assets to your non-citizen spouse, contact an experienced Overland Park estate planning attorney at Parman & Easterday by calling 405-843-6100 or 913-385-9400 to schedule your appointment today.
Can I make my non-citizen spouse the beneficiary of my life insurance policy?
The proceeds of a life insurance policy are considered a non-probate asset. Therefore, the money is paid out to the named beneficiary without going through probate or being subject to tax.
Who will manage the assets held in the QDOT trust?
When the trust agreement is created, you must appoint a Trustee to manage the trust assets and administer the terms of the trust. As the Trustor or Grantor of the trust, you can name anyone as the Trustee, but given the complicated nature of a QDOT, a professional Trustee should be considered.
Are there any additional estate planning concerns if I am married to a non-citizen?
If your spouse is not a U.S. citizen, estate planning takes on heightened importance. Your spouse’s status could directly affect how assets owned jointly, property owned outside the country, and a variety of other issues are handled in your estate plan.